December 2010

December 19, 2010

I’ve never liked the so-called standard guidelines when it comes to the amount of money that is dictated as OK to spend each month on housing. According to the “experts,” it is perfectly fine to spend up to about one-third of your gross monthly income on monthly housing expenses, defined as the total of your principal, interest, taxes, and insurance. I guess the escape hatch for the experts is the use of the words “up to;” that way, they can guiltlessly defend quoting the too-high figure of 30 percent or so (the precise limit will vary depending on whom you ask, but, again, it’s always around one-third of gross monthly income).

According to the popular website Bankrate.com (www.bankrate.com), the upper limit should sit at 28 percent, which is actually a few percentage points lower than that quoted elsewhere. Still…28 percent is still way too high, folks. Think about it in practical terms. Let’s say, between you and your spouse, your gross annual income is about $70,000. Dividing that figure by twelve, we come up with a gross monthly income figure of about $5800; $5800 to cover everything…housing, cars, food…everything. According to the “rules,” you should still be OK if you allocate $1600 of that figure each month to your housing expenses (again, defined as principal, interest, taxes, and insurance).

Sorry…but that’s too much.

I remember when I bought my first house as a much-younger man, I ended up with a payment that represented about 17 percent of my gross monthly income at the time…and you want to know something? I didn’t have a good night’s sleep for the following two weeks, so worried was I about having to meet that obligation each month. I eventually began to relax about it, and I saw that it was manageable, but I will also tell you that there were plenty of months of unexpected expenses that, if I’d had an appreciably higher payment to deal with, there’s no way I would have been able to make it….and 17 percent is a lot lower than 28 percent.

The good news for home buyers these days is that the market is so hopelessly glutted with distressed properties that there is plenty of opportunity to buy one with a payment that is much lower than one-third of gross monthly income. To do that, however, means having to resist the temptation for more, and be happy with less; to look at a house as a four walls and a roof that becomes a home not out of deference to its size, but out of deference to the people who occupy it.

Bob Yetman, Editor-at-Large at Christian Money.com (www.christianmoney.com), is an author of a variety of materials on personal finance and investing, as well as on topics of fitness and self defense, to include the recently-released book Investor's Passport to Hedge Fund Profits (John Wiley & Sons, Inc; www.investorspassport.com) and the new unarmed combat training DVD Thunderstrikes - How to Develop One Shot, One Kill Striking Power (Paladin Press; www.mikereevesonline.com).

December 03, 2010

Courtesy of The New York Times, people from both within and without the United States have learned about the story of Nick Martin and his family. In an article that appeared on November 29, we read about what happens when someone mishandles a windfall of money ($10 million, in this case, received from the sale of a family business). I would encourage you to read the article yourselves, and you may find it here:

I have always said that the quick receipt of a financial windfall of such a size that it represents wealth by any measure does not change character as much as it reveals the true nature of one’s character. That may seem unkind to Mr. Martin, but the reality is that no one, ultimately, is compelled to spend even a dime of such a windfall in any remotely speculative or frivolous fashion. They do so because they choose to do so…and when they do so again and again, well, the sympathy factor among the rest of us tends to drop to a value of zero.

To his credit, Mr. Martin seeks not our sympathy but rather to simply tell his story, which he has done at the risk (and realization) of embarrassment and ridicule. If he has anything of real value left, it is probably the illustrative benefit of his story, which we should all be grateful he decided to share.

While it is tempting to want to hold responsible the simple misfortune at being left without a chair when the sweet songs of national and global financial stability and comfort stopped playing in 2007, a closer examination of Mr. Martin’s circumstances shows us that a greater adherence to modesty would have gone a long way to keeping he and his family from serving as another example of riches-to-rags hardship amidst the current economic collapse.

Although he includes himself as one of those to blame for his troubles, so, too, does he blame the “conventional wisdom of investing in stocks and real estate.” I’m not sure what that means, exactly. I am personally acquainted with many who have maintained a portfolio of stocks and real estate throughout this economic mess, and while the values of their holdings are certainly down, these people are by no means broke. In fact, the stock market, after all of the upheaval of the recent years, is actually now, as a whole, down only about 20% from its all-time high. 20% is certainly significant, and that figure belies the acute decimation of once-solid sectors like the financial services industry, but it should by no means result in the complete destruction of an even remotely well-diversified portfolio. Turns out, as we read on, that Mr. Martin was forced to satisfy margin calls in his brokerage accounts that came about because he borrowed against them, and it is that which appears to have destroyed his holdings.

As for his real estate acquisitions, those, too, appear to be characterized by a strong measure of overindulgence and misguided judgment. Contrary to what some have come to think these days, real estate can be a worthwhile, long-term financial asset, but the transaction associated with acquiring a piece of property has to itself be characterized by great due diligence and analysis.

Measured, reasoned investing, and that which is without measure and prudence, may both technically be examples of investing, but in reality the two have little in common.

I have a friend who came to receive a sizable, though not enormous, windfall of his own upon the death of his last remaining parent. Although the sum he received was certainly large enough to get him in a bunch of trouble, he will have none of it; he paid off the mortgage he had on the small home in which he was living when he received the money, and has remained in that residence since. He has invested the balance of the money in an array of conservative stock mutual funds. He continues to work at his job, one that is most unglamorous. The truth is that he could afford to be considerably less careful with his spending habits and still be OK, but has no interest in acting accordingly. I asked him about that, and he told me that when he first learned about the money he was getting, he was scared. Not relieved, but scared. Why was he scared? Because when he looked at the money, he saw not a free ticket to high living, but, rather, a huge obligation.

Being scared might have been an overreaction, but as a first reaction, it is very telling. He was scared and intimidated, and he liked it that way. Turns out, that trepidation is what ensures he will always have his money; it is his emotional backstop, one that will prevent any wild financial pitch he errantly throws from becoming irretrievable. Over time, as he forces the existence of the money to adjust to his temperament, rather than changing his temperament to accommodate the availability and temptations of such a sizable sum, he will surely partake of indulgences here and there, but he will always have what he needs to care for he and his wife, come what may, as they age.

Being acquainted with him as long as I have, I know that he came by his nature both at the behest of his upbringing as well as at the behest of his innate personality. However he came by it, that reserved approach to both money and life has served him well, and should the aforementioned Mr. Martin ever find himself with another windfall, behaving in a similar fashion will surely serve him as well, also.

Bob Yetman, Editor-at-Large at Christian Money.com (www.christianmoney.com), is an author of a variety of materials on personal finance and investing, as well as on topics of fitness and self defense, to include the recently-released book Investor's Passport to Hedge Fund Profits (John Wiley & Sons, Inc; www.investorspassport.com) and the new unarmed combat training DVD Thunderstrikes - How to Develop One Shot, One Kill Striking Power (Paladin Press; www.mikereevesonline.com).